The First Step To Investment SuccessBy Carlo Rossi

The First Step to Investment Success

 

Imagine a guy who has been invited by his friends to their golf club. While he walks about and enjoys the beautiful gardens of the club, he has no idea that his friends have started a game and they have included him without telling him! Who do you think will have the worst score?

 

Most people who are not finance professionals are in a similar situation; they have been invited to the finance club but they don’t know they are already registered in a competition. And this competition has a huge effect on their financial life.

 

What is this competition?

 

To understand that, let’s take a general look at how our economy works. Our economy needs workers and money (‘capital’) to produce wealth (economists call this wealth we produce each year, “GDP”). When we work, we get rewarded with a salary. In the same way, when we save money, we get rewarded with extra money, called ‘interest’, ‘dividend’ and ‘capital appreciation’ or simply ‘returns’ on our savings.

 

However, not everybody has the same salary or the same returns on their savings. That is because our economy is based on competition, called the market. This is true for all parts of the economy. Companies compete for customers. Employees compete for jobs. Savers compete for returns on their money. The better they are in their products, or their work, or their savings, the more money they make.

 

Since each of us can provide both labor and capital (money we save) to the economy, we all take part in two competitions: one for labor and one for capital.

 

Most people understand the competition for labor well. They realize that the better they are at their job, the higher the salaries they can get. That is why people try to get the best education and work hard every day to improve their skills in order to earn higher salaries.

 

The competition for capital works in the same way. The better we are at investing our money, the higher the returns we receive for our savings.

 

Yet, in the competition for capital, people behave differently. Instead of behaving like they do in the competition for labor (working hard and being smart) they tend to look for tips, short cuts and quick ways to make money. But this is not a successful way to win any competition, and it is not what these same people do in their competition for labor. It is not surprising that the returns they get for their investment are poor.

 

In our experience, the reason people don’t behave so logically with their savings is because they don’t realize that they are in a competition for capital (though they realize they are in a competition for labor). Just like our golfer, if people don’t know they are taking part in a competition, they are sure to fail.

 

The sooner people realize that everyone who has some money is taking part in this competition (even if they just leave their money in a bank account), the sooner they start to improve. Because once they realize they are in a competition, they start to approach it as a competition: like any game, they first start to learn the rules of the game, and then the strategies they can use to win it.

 

It’s actually quite simple, but you can’t win a game if you don’t know you are playing one.

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